Luxury brands can ban resale on third party websites Euro Court judgment

HomePerspectivesLuxury brands can ban resale on third party websites Euro Court judgment

As widely expected, the European Court has followed the opinion of its Advocate General (see our previous alert) and upheld a clause in a selective distribution agreement for Coty cosmetics which prevents authorised retailers from selling Coty products on any third party websites.

Luxury brands will be delighted with the judgment, although some feel that the judgment does leave a measure of uncertainty regarding its application to the sale of products outside the luxury sector under selective distribution systems.

In its judgment, the Court confirms that selective distribution systems (where resale may be undertaken only by authorised outlets) do not fall within the prohibition on restrictive agreements in Article 101 of the Treaty on the Functioning of the European Union at all, so long as:

resellers are chosen on the basis of objective criteria of a qualitative nature, applied uniformly and without discrimination

the products in question need to be sold by authorised resellers only in order to preserve their quality and proper use; and

restrictions imposed do not go beyond what is necessary to achieve this.

The court goes on to set aside doubts arising from its previous ruling in Pierre Fabre, making it now clear that the preservation of a luxury image can be sufficient justification for the imposition of restrictions on resale associated with selective distribution systems.

The Court states that it is for the German court (which had referred the case to the European Court) to determine whether, on the basis of the facts of the case, the third party website ban went beyond what was necessary to protect the luxury image of Coty’s products. However, the European Court judges nevertheless give some fairly strong steers to their German counterparts:

The European court states that it is key in a selective distribution system that the link between the goods in question and their authorised resellers should not be compromised. Permitting sales on third party websites would appear to compromise this essential link

The court also upholds its Advocate General’s view that since a third party platform used by a reseller would have no direct contractual link with the brand owner, compliance with the brand owner’s requirements regarding resale of the goods would be difficult for the brand owner to police.

The Court also observes that since third party platforms would typically sell all kinds of goods, the sale of Coty’s products on these sites would prejudice the luxury image maintained through the requirement that authorised resellers sell (both in brick and mortar outlets and online) in a context that promotes the luxury image of the product.

Finally, the Court notes that the prohibition in Coty (unlike the prohibition in Pierre Fabre) does not restrict all internet sales, but only sales by third parties. The fact the restriction is limited should therefore make it easier to justify.

Third party platforms and some competition regulators will be disappointed by the judgment. The President of the German competition authority, Andreas Mundt, has reportedly expressed the view that the scope of the judgment should be limited to luxury products only, and that it does not imply a blanket authorisation for brand owners outside the luxury sector to prevent sales on third party sites.

However, although the judgment clearly does not provide any automatic authorisation for such a ban – it will always be necessary to consider whether the restriction on use of third party platforms is necessary to preserve the required context for the sale of the goods in question – it does not seem logical to restrict the application of the judgment to the luxury sector only. For example, in a case where a selective distribution system is justified to ensure the availability of advice to consumers for the purchase of technologically complex products, it is difficult to see why the court’s reasoning in Coty would not apply equally to a provision banning authorised resellers from using third party sites. If selective distribution is justified in the first place to preserve the quality and proper use of the products in question, then there seems to be no good reason why the Coty judgment would not apply to the sale of those products on third party sites.